Yesterday, the SEC issued an enforcement order regarding Munchee’s token offering and SEC Chairman Jay Clayton released a general public statement on cryptocurrencies and ICOs.  For those who previously read our post about the SEC’s report in the DAO, much of this might not be a surprise – although the SEC staff did answer the call of discussing so-called “utility tokens.”
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Article prepared by and republished courtesy of our colleagues Luke Gannon, Scott Thiel and Hayden Lau; originally published here:
https://www.dlapiper.com/insights/publications/2017/09/the-sfc-comments-on-icos/

The Securities and Futures Commission of Hong Kong (the SFC) has debunked the myths that no securities laws apply to ICOs. In its first direct statement on the subject, the SFC fired a warning shot at issuers and intermediaries of ICOs and token offerings, reminding them that they may be conducting regulated activities and therefore, may be required to be licensed by or registered with the SFC, irrespective of where they are located.
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One of the more interesting phenomena in early-stage investing is the recent emergence of initial coin offerings (“ICOs”), token generation events (“TGEs”), or similar distributed ledger or blockchain-enabled means for raising capital. Much has been written, including by many skilled lawyers in the technology sector, about whether the tokens issued in these structures involve “securities” – and, frankly, some of it is unhelpful. Hungry for something that seems like crowdfunding, but that actually works to raise meaningful capital for promising technology initiatives, many in the technology space really want these
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Megan Muir.jpgCONTRIBUTED BY
Megan Muir
@megan_muir

The SEC has made official what we blogged about yesterday:  Late yesterday it removed from its agenda for today’s meeting the consideration of general solicitation in Rule 506 and Rule 144A offerings.  The SEC also released a separate meeting notice for August 29, 2012, which states it will consider whether to propose rules to eliminate the prohibition against general solicitation and general advertising in securities offerings conducted pursuant to Rule 506 and Rule 144A.

Since the SEC’s action would be to propose rules, it will
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Earlier this month, the SEC announced that at its meeting tomorrow it would be considering rules to eliminate the prohibition against general solicitation and general advertising in securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act and Rule 144A under the Securities Act. However, in response to a flurry of comments, the SEC has clarified it will not be adopting interim final rules at the meeting tomorrow and, instead, would follow the usual rulemaking process of proposing revisions to the rules, receiving public comment on the proposals, considering those comments, and then adopting final rules. This rulemaking process generally takes several month to complete.

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Megan Muir.jpgCONTRIBUTED BY
Megan Muir

As a quick follow up on this topic from a few months ago (prior post can be read here), the SEC has approved alternatives to Nasdaq’s historical $4 minimum bid price listing standard.  Under the new alternative listing standards, a security may qualify for listing on the Nasdaq Capital Market if:

$3/share price — for at least five consecutive business days prior to approval, the security has a minimum closing price of at least $3 per share and the issuer has either:

  • Equity Standard:  (A) stockholders’ equity of at least $5M; (B) market value of publicly held shares of at least $15M; and (C) a two year operating history; or
  • Net Income Standard:  (A) net income from continuing operations of $750,000 in the most recently completed fiscal year or in two of the three most recently completed fiscal years; (B) stockholders’ equity of at least $4M; and (C) market value of publicly held shares of at least $5 million; or

$2/share price — for at least five consecutive business days prior to approval, the security has a minimum closing price of at least $2 per share and the issuer has (A) market value of listed securities of at least $50M; (B) stockholders’ equity of at least $4M; and (C) market value of publicly held shares of at least $15M.

In addition, the issuer must also demonstrate that it has:

  • Net tangible assets in excess of $2M if it has been in continuous operation for at least three years;
  • Net tangible assets in excess of $5M if it has been in continuous operation for less than three years; or
  • Average revenue of at least $6M for the last three years.


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A_Ledbetter_LR.jpgCONTRIBUTED BY
Andrew Ledbetter
andrew.ledbetter@dlapiper.com

The Facebook IPO is a pretty big deal generally. Whether Facebook would go public stirred media frenzy and Congressional testimony in the past year. Facebook’s initial registration statement indicated it would be the largest tech company IPO ever (the fee table on the original filing showed a $5 billion offering – the filing fee alone was $573k).  And the company’s social importance is undeniable.

But what will the SEC staff think about Facebook’s disclosures? Will the path to going public hit some speed bumps? We got our first big clue on Wednesday, when after the markets closed Facebook filed its first substantive amendment to the Form S-1 for its IPO. (It filed Amendment No. 1 shortly after its original filing, solely to add exhibits.)

On interesting deals, I sometimes compare an amended S-1 to the prior filing to see what changed. Seeing what disclosures a company has changed lets me surmise whether SEC comments may have driven the change and piece together the issues the SEC staff has raised with the filing. In a deal like Facebook’s, you can assume the staff heavily, carefully reviewed the filing, so the comments the staff elected to give may reveal points of general SEC emphasis, with potential application to other companies. A deal like this also tends to become a frequently used source for future disclosures by other companies looking for precedents, which makes monitoring Facebook’s disclosures particularly interesting. 

Or perhaps that’s just my rationalization – I just couldn’t help but spend a few hours looking at this…

In any event, for kindred spirits, my guess is that Facebook probably received SEC comments clustered around the themes discussed below. For those who do not routinely review registration statements, this post will be fairly technical and you may want to stop reading now.


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A_Ledbetter_LR.jpgCONTRIBUTED BY
Andrew Ledbetter
andrew.ledbetter@dlapiper.com

In addition to legislative initiatives we’ve previously discussed, we continue to see efforts to relax the general solicitation prohibition in private offerings.  For example, the SEC’s Advisory Committee on Small and Emerging Companies recently made a formal recommendation that the SEC take immediate action to permit general solicitation and advertising in private offerings under Rule 506 where the securities are only sold to accredited investors.  In addition, the Managed Funds Association, an organization of investment professionals in hedge funds, funds of funds, and managed futures funds, has used the somewhat uncommon process of submitting a petition for rulemaking to the SEC, asking the SEC to eliminate the ban on general solicitation and advertising for offerings or sales of securities by “private funds.”


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A_Ledbetter_LR.jpgCONTRIBUTED BY
Andrew Ledbetter
andrew.ledbetter@dlapiper.com

As expected, the SEC has adopted final rules regarding the exclusion of a person’s primary residence, and related debt securing the residence, from the “net worth” standard for accredited investors.  The final rules are substantially similar to those the SEC previously proposed, which we summarized in this earlier post.

Under the new rules, in calculating “net worth” for purposes of determining if a person’s individual net worth, or joint net worth with the person’s spouse exceeds $1,000,000:


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